Australian shares are poised to tumble, in line with heavy losses in New York, as the August US consumer price report paved the way for higher and more aggressive rate rises.

What Happened

US inflation figures were released last night and missed market expectations.

CPI August numbers were released and were up 0.1% on last month.

Whereas, market expectations had inflation falling 0.1%.

How Did This Affect Markets

It doesn’t look like much on face value, however markets believed inflation had peaked and were falling.

This had experts and investors alike becoming more optimistic about the economic outlook.

The optimism had flow on effects to other factors in the economy, including rate increases, stock market performance (more importantly earnings of underlying companies), and unemployment numbers, with the probability of a recession reducing each day.

However, this has all been flipped on it’s head overnight. With markets becoming increasingly uncertain on where to next.

What Next?

Newcastle Advisors have been relatively cautious over the past 12 months.

With new clients coming aboard, we have been dollar cost averaging into the market, as we (along with many experts) felt the market and the central bank had got things wrong.

The overnight uncertainty has seen the confidence levels rise of a 0.75% rate rise in a few weeks. However, there are a number of experts that are stating that 0.75% may not be enough and the Fed may look to knock all confidence and optimism out of the markets with a 1.00% rise.

However, the contrary view is that Federal Reserve Chairman will look to meet market expectations and not create anymore uncertainty, whilst positioning a larger rate rise in October and further reintegrating that a pause in the tightening cycle is off the table (for the time being).

What Were the CPI Numbers?

The consumer price index edged up 0.1 per cent last month after being unchanged in July. Though consumers got some relief from a 10.6 per cent decline in gasoline prices, they had to dig deeper to pay for food, rent, healthcare, electricity and natural gas.

Food prices rose 0.8 per cent, with the cost of food consumed at home increasing 0.7 per cent. Food prices surged 11.4 per cent over the last year, the largest 12-month increase since May 1979.

Owners equivalent rent, a measure of the amount homeowners would pay to rent or would earn from renting their property, increased 0.7 per cent. It jumped 6.3 per cent on a year-on-year basis, the largest increase since April 1986. Rents are sticky and account for a significant share of the CPI basket, meaning that inflation will remain elevated for some time.

Economists polled had forecast the CPI dipping 0.1 per cent. In the 12 months through August, the CPI increased 8.3 per cent. That was a deceleration from July’s 8.5 per cent rise and a 9.1 per cent jump in June, which was the biggest gain since November 1981. Inflation has overshot the Fed’s 2 per cent target.

What Does This Mean For You?

We will continue to see market volatility plague the investment markets for the remainder of the year, until some level of certainty returns to the economy.

Therefore, when looking to invest, continue to dollar cost average into the market until volatility and certainty returns.

If you are currently fully invested, continue to look at your long term goals and investment strategy. Now is not the time to crystallise losses and jump out of the market. It is time in the market rather then trying to time the market. Especially with where the economy is at, you don’t want to miss the day the market jumps and optimism returns.

If you are looking at your home loan and freaking out at where rates are heading, the end is in sight. We need to understand that we are looking at potentially another 1.25% rate increase before rates stabilise and potentially reduce at the end of 2023/start of 2024.

Support

Reach out to our Newcastle Financial Planners if you have any concerns or wish to review your situation.

Sources:

https://www.afr.com/markets/equity-markets/asx-to-plunge-after-brutal-wall-st-sell-off-20220914-p5bhus

https://www.wsj.com/articles/global-stocks-markets-dow-update-09-13-2022-11663065625

https://www.cnbc.com/2022/09/13/tech-stocks-crushed-in-market-selloff.html

https://www.cnbc.com/2022/09/13/this-recession-signal-takes-center-stage-as-talk-of-a-full-point-hike-gets-louder.html

https://au.finance.yahoo.com/news/wall-st-tumbles-us-inflation-144654863.html

Market Update - September